CIC sails through global rough seas

Stronger governance, management infrastructure and risk management have steered the China Investment Corporation through the global financial crisis and emerge with a large buffer of cash, the annual report says.The CIC’s second annual report, published last week, shows the fund lifted its total return on capital from 6.8 per cent in 2008 to 12.9 per cent last year. For its global portfolio, which makes up just over half of the $200 billion with which the sovereign fund was formed in September 2007 as the first shocks of the global crisis emerged, the return was 11.7 per cent in 2009 compared with minus 2.1 per cent the previous year.

The global portfolio’s broad asset allocation at December 31 was 36 per cent in equities, 26 per cent in fixed interest, 6 per cent in alternatives and 32 per cent in cash.

The rest of the CIC’s initial funding is invested in a range of Chinese financial institutions, through the subsidiary Central Huijin, such as 50 per cent of the recently floated Agricultural Bank of China and 35.3 per cent of the ICBC.

Last year the fund made new investments – both direct and portfolio investments – totalling $58 billion, compared with $21 billion in its first 15 months of operation. The global portfolio is divided into diversified holdings, of 77 per cent, and direct concentrated holdings of 23 per cent. Of the diversified holdings, 41 per cent is internally managed and 59 per cent outsourced.

Reflecting the increased level of activity, staff numbers were lifted over last year by almost 100 to 250. Most of these (80 per cent) have post-graduate qualifications and about half have international work or education experience.

Lou Jiwei, the chairman and chief executive, says in the report that the key to the fund’s good performance last year was the steps it took to strengthen governance and enhance management infrastructure, as well as improving risk management capabilities.

The fund made several initiatives on risk management last year, including: establishing an operational risk group within the risk management department; implementing a new internal control function; and increasing the focus on operational and credit risk with clearing banks and custodians.

Lou Jiwei observes that 2010 will continue to present a challenging investment environment, as markets remain volatile.

“However, we are a long-term investor with a positive long-term view,” he says. “While CIC, like all investors, measures and reviews its annual results, they are milestones on a longer journey…”